Indonesia’s
finance minister Bambang Brodjonegoro told Euromoney
earlier this year that tax collection falls way short of
targets and must improve to provide funding for
infrastructure and other projects

It doesn’t take much for
Indonesia’s government officials to rattle
Singapore’s private bankers.

Talk of tax amnesties and the need for greater disclosure of
the funds Indonesians keep offshore in Singapore, as well as
closer scrutiny of how Singapore-based private bankers operate
on Indonesian soil, is sending shivers through the
city-state’s financial community.

At stake are hundreds of billions of dollars parked in
Singapore, which Indonesia wants repatriated to bolster tax
revenue and pay for crucial infrastructure but which Singapore
considers important for its flourishing financial services
sector.

It’s an open secret that Singapore is a second
home for many Indonesians, especially among its wealthy, ethnic
Chinese community. Singapore is where Indonesia’s
elite can keep secret bank accounts, jewels and safe deposit
boxes, not to mention second homes, maybe a mistress or two,
and where they come for medical treatment, to shop for designer
clothes, gamble at the casinos, or put their heirs through
school.

Wealthy Indonesians are legally obliged to declare their
worldwide income and assets for domestic tax purposes, but in
reality they often don’t, especially if the money
comes from corrupt practices.

For resources-starved Singapore, private banking is an
important industry, creating jobs and revenue. Last year,
Singaporean bank
DBS bought the Asian private banking business of
Société Générale in Singapore
and Hong Kong for about $220 million to boost this side of the
business, having already poached one of
Singapore’s leading private bankers, Su Shan Tan,
from Morgan Stanley.

The city-state has attracted an estimated $470 billion in
private banking assets and ranks sixth in the global league
tables, after Switzerland, the UK, the US, Panama &
Caribbean, and Hong Kong, according to a recent report by The
Deloitte Wealth Management Centre Ranking 2015.

Of that total, Indonesian officials put the amount of money
Indonesians have stashed away in Singapore at around $300
billion – split roughly half and half between
individuals and companies.

His government plans to introduce a tax amnesty to encourage
Indonesians to repatriate their funds. But the proposal is
highly controversial because in return for bringing back the
money, these Indonesians would be pardoned for any financial
crimes committed, such as corruption, money laundering and tax
evasion.

We have a bigger agenda, an agenda to bring
back the funds from overseas. In order to do that,
people need assurances

Bambang Brodjonegoro, Indonesia’s
finance minister

"The point is that this bill is not merely about tax,"
Brodjonegoro told The Jakarta Post newspaper in a recent
interview. "We have a bigger agenda, an agenda to bring back
the funds from overseas. In order to do that, people need
assurances. In exchange for having to pay taxes, they want
their past crimes — which led to them owing so much
— to be forgiven as well."

He continued: "They got their money somehow, and how they
got it may not be in accordance with our laws, for example
through tax crimes. Most importantly, when we repatriate the
funds and tell them to pay the taxes, there has to be an
incentive. And that incentive is in the form of an
amnesty."

Finance ministry officials have indicated the law could be
implemented as soon as this year or next, and that once the
money is brought back to Indonesia, it must stay there.
Brodjonegoro said in the newspaper interview that repatriated
funds would be locked in, to prevent them from being stashed
overseas again. The amnesty will aim to put an end to capital
flight, he said.

But bankers in Singapore and Indonesia warn that it would be
difficult to ensure the repatriated funds stay in
Indonesia.

"The only way to control things is through transfer of funds
and that would mean capital controls which would not look good
for Indonesia," says one foreign banker in Jakarta.

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